Written by: Evan Barrows
Wrap fee programs present a conflict of interest as the advisor is incentivized to keep their internal costs down by trading less frequently. However, these savings are not passed on to the clients, who continue to pay the same fee, regardless of the accounts actual trading level. A advisors brokerage practices, especially if they utilize step out trades, can result in additional charges to a client. Step-out trades, also called trading away, occurs when a wrap fee manager directs trades to a broker whose fees are not covered by the wrap program. While there are many valid reasons to do this, include best executions, it may result in the client paying additional brokerage fees Disclosures:The SEC has brought several enforcement actions against wrap fee managers and sponsors over inadequate disclosure. At the core of these cases, the SEC looks to determine whether or not clients were fully informed of the costs of a wrap fee program as compared to the cost of a traditional investment advisory fee. In the view of a regulator, the wrap fee brochure provided to clients must contain all material facts about the advisors conflicts of interest, as well as wrap fees total costs, including the managers step out trading practices (if applicable), and whether there will be any additional expenses, such as mutual fund fees.Any time an advisor recommends a client invest in a wrap fee program, regulators expect that the advisor is acting in the clients best interest. You should closely review the costs, and services provided in the wrap program, as compared to other investment platforms, and be able to evidence your rationale for recommending a wrap fee program to your clients. Assess the trading activity and determine whether there are any instances of reverse churning If certain accounts are in a wrap, conduct a comparison to trading in similar accounts that are not in a wrap fee program Conduct an analysis of what fees would have been in a wrap vs non wrap. Items to take into consideration include, but are not limited to : trading activity types of investments cash balances investment objectives Determine whether the client paid more than they would have paid in a traditional program and assess whether the wrap fee program continues to serve the client’s best interest in light of the anticipated activity in the account.